Jordan’s Surprise Runs Gamut From ‘Idiotic’ to ‘Brave’
(Corrects to say Global Brokers NZ went out of business in fourth graph.)
(Bloomberg) — On the question of whether Thomas Jordan is a hero or a villain, investors are leaning toward the latter.
While the Swiss National Bank president said his shock decision yesterday to remove the cap on the franc was necessary, the question traders are asking is: Why now?
“Why not over the weekend?” said Simon Derrick, chief foreign-exchange strategist at Bank of New York Mellon Corp. “Why not at least give people time to digest the news? The move may still have been 15 percent or 20 percent ultimately, but it may have taken place at least in a point at which people could have thought a bit more carefully.”
The surprise decision, three days after SNB Vice President Jean-Pierre Danthine said the currency ceiling “must remain the pillar of our monetary policy,” sent the franc surging as much as 41 percent against the euro. Dealers were swamped with orders, New Zealand-based Global Brokers NZ Ltd. went out of business, and others said they lost millions of dollars.
“These people are meant to be the experts and yet they’ve acted in such a way that caused significant harm to the markets, something most people could have predicted would happen,” said Craig Erlam, an analyst at Alpari U.K. Ltd. in London, which said it is now insolvent. Erlam called the decision “idiotic.”
The damage won’t be limited to financial professionals, according to Derrick. One of the central bank’s roles is to avoid the volatility that affects companies and people who borrow in Swiss francs, he said.
Swiss watchmaker Swatch Group AG was quick to respond yesterday, describing it as a “tsunami” for exports.
Justified Action
“It suggests that they’re not perhaps the solid, stable central bank that we’d want,” he said in an interview on Bloomberg Television’s “Countdown.” “Perhaps they were on the back foot rather than on the front foot and from that perspective, does that make you feel comfortable with the SNB? No.”
In his defense, Jordan said at a press conference in Zurich yesterday that a tool like the cap would always need to be abandoned unexpectedly. The SNB spent billions defending the minimum exchange rate after introducing it in September 2011, and the pressure has increased as European Central Bank policy makers prepare to consider fresh stimulus in a meeting on Jan. 22. The SNB today declined to comment on the timing of the announcement.
Across the border in Germany, former ECB Chief Economist Juergen Stark was supportive. Germany has been the heartland of opposition to what critics see as excessive central-bank liquidity that affects markets.
‘Bizarre Choice’
“It’s brave and justified,” he said in an interview with Swiss newspaper Neue Zuercher Zeitung. “Since 2008, markets have become too accustomed to central banks’ crisis management. Turning the money tap off at some point leads to distortions in the markets — we see this in the U.S. and now in Switzerland.”
Backing for the SNB’s actions from the financial markets is scarce, though not absent. Anatoli Annenkov, senior economist Societe Generale SA in London, said “it’s to some extent understandable.” Even so, the more common refrain was echoed by Nick Parsons, head of research for the U.K. and Europe at National Australia Bank Ltd.
“It is quite possibly one of the worst central bank decisions ever,” he said by phone from Sydney. “The trade-off was either the possibility of future poor outturns on inflation, or certain negative outcomes immediately on the economy. And they’ve chosen the policy decision that ensures bad things happen today — that is quite a bizarre choice to make.”
To contact the reporters on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net; Stefan Riecher in Frankfurt at sriecher@bloomberg.net To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Zoe Schneeweiss
